(Bloomberg) -- Drugmaker Mallinckrodt Plc may seek bankruptcy protection to resolve a dispute with the government over its blockbuster Acthar drug and claims that it profited from the opioid addiction crisis.
The company is working with external advisers, creditors and litigation claimants and is considering “all options to address legal and financial challenges,” according to its second-quarter earnings statement Tuesday. This could include Chapter 11 bankruptcy for its main business and most subsidiaries.
“This is a challenging situation,” Chief Executive Officer Mark Trudeau said on a conference call with investors and analysts. He said the company will likely be under pressure for the rest of the year. Mallinckrodt's shares plunged as much as 35% to $1.48 during regular trading in New York. The stock fetched more than $120 five years ago.
Piper Sandler equity analyst David Amsellem threw in the towel on Mallinckrodt, cutting his rating to underweight from neutral and slashing his price target to $1 from $3. With bankruptcy of the whole company now on the table, “Acthar-related liabilities are proving to be something of a tipping point.”
Acthar Gel, Mallinckrodt's best-selling prescription drug, is used to treat autoimmune disorders and rare diseases. The company has been in a dispute with the Centers for Medicare & Medicaid Services over rebates for the injectable drug.
Citigroup analyst Navann Ty kept her sell rating and said she expects Mallinckrodt could file for Chapter 11 “in the near-term.”
Debt Gains
Some of Mallinckrodt's debt rallied following the disclosure. Its 5.75% notes due 2022 rose more than 2 cents to almost 20 cents on the dollar, according to Trace trading data. Mallinckrodt's term loan due 2024 also rose a point to nearly 85 cents, according to Bloomberg data.
Mallinckrodt listed more than $5 billion of debt and $818.3 million of cash on its balance sheet as of June 26. It also fully drew down a revolver. The company said it risks violating terms of its debt in the next 12 months.
Sales dropped almost 80% to $166.5 million, hit by a one-time liability charge of $534 million related to the Acthar dispute. Without that, sales would have come to about $700 million, a 15% drop from a year earlier, according to the statement.
Costly Disputes
Mallinckrodt, one of the largest opioid makers in the U.S., is looking to resolve lawsuits about the painkillers from thousands of plaintiffs. Attorneys general in almost every state have been involved in settlement talks. The firm has vowed to fight claims that it over-promoted the addictive drugs, but the company's peers have lost legal fights or opted for expensive settlements.
It's also entangled in a dispute with the U.S. Centers for Medicare and Medicaid Services over Acthar's pricing. Mallinckrodt sued to head off the agency's demand for rebates, but a trial court ruled that Mallinckrodt has to repay more than $600 million.
The company took a $639.7 million charge for the rebate liability, according to the statement.
The firm hadn't previously set aside reserves to cover the claims, and it had to tap its entire revolving credit line in August to get more cash. It's been grappling with the lawsuits as the Covid-19 pandemic crimped demand for certain medications and increased competition eroded sales and profits.
This isn't the first time Mallinckrodt has discussed filing Chapter 11 for at least some of its business. In February, the company said it may seek bankruptcy protection for its generics unit to settle opioid claims. That plan would preserve revenue at its specialty drug units and let it pursue a broader corporate turnaround.
Read more: Mallinckrodt opioid plan: Sacrifice a part to save the whole
Should the drugmaker choose to file its entire business for bankruptcy, it would follow the path taken last year by peers Purdue Pharma and Insys Therapeutics Inc.
Mallinckrodt's timing and decision over whether to file may be influenced by a looming trial in Tennessee next month. The firm's generics units, along with Endo International Plc, face claims by a local prosecutor that the companies illegally marketed their opioid painkillers and swamped the state with the product. The company faces similar claims in New York.
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